In a game that resembles kid’s play “cat and mouse chasing each other”, the e-commerce companies have so far succeeded in eluding the state sales tax/VAT [value added tax] authorities not paying thousands of crores that are legitimately due to the latter on transactions done on their portal.
In a bid to nab them, the Karnataka commercial taxes department has now come up with an ingenious idea asking the e-commerce company to deduct 1% of the money payable to the merchant towards tax and remit the same to the department. The merchant/dealer in turn, can then claim credit or refund on this amount while discharging his liabilities.
What is this 1%? It is certainly not the applicable VAT rate which is substantially higher. Even this negligible rate is not intended to go to the coffers of the state treasury as the dealer from whose revenue stream it has been deducted can claim reimbursement from the commercial tax department. Then, what is it and what purpose, it is intended to serve?
The only possibility one can think of is that by doing so, the tax department intends to get to know details of all transactions done on their platform so that it can chase the dealers for collecting the VAT dues [as per an internal calculation by the state government, outstanding liabilities from e-commerce companies are about Rs 2000 crores]. The intention is fine but the route chosen is wrong.
All along, e-commerce companies have taken a stance that they neither buy goods nor sell and are merely ‘facilitators’ providing a platform to sellers and buyers to conduct transactions. The department has accepted their stance – without conducting due diligence and verifying who they are – and not registered them as dealers under the state VAT law. Then, how can it even ask them to deduct tax albeit even it is miniscule [notional] @ 1%? Such a step is legally untenable and will be struck down by the court.
In a case involving Larsen and Toubro, the Karnataka High Court [KHC] struck down a provision in the Karnataka Sales Tax Act [1957] that required government agencies to deduct a certain percentage of tax before making payments to a private contractor handling government projects. The court had ruled that tax authorities cannot claim tax at source without quantifying the liability of the dealer [contractor]. Supreme Court [SC] too has barred excess deduction of tax at source by tax authorities.
The tax authorities need to have a clear focus. They should proceed on the fundamental premise that if a sale transaction has taken place on the e-platform then, liability for payment of tax inevitably arises. Therefore, they need to follow the logical step of identifying who is the seller. They must determine whether it is the merchant on the e-commerce company. For this, it should undertake a comprehensive exercise on its own and must not go by the claim of e-commerce company.
A close look at the manner of operations will bring out the truth. The customer registers his/her request for an article on the web portal of e-commerce company which raises the invoice and arranges for its delivery at customer’s address. The company also receives consideration either through net-payment or cash paid by customer to its delivery person. It accepts rejections and arranges for refund.
In short, it performs all sales related functions viz., stocking products, booking order, raising invoice, making delivery [by providing logistics and transportation support], receiving payment, accepting rejections, making refunds and for that purpose, maintains direct interface with the customer all through. In essence, e-commerce companies are retailers yet ‘camouflage’ this reality behind what they euphemistically term as facilitators.
To buttress this, they employ all sorts of documentation techniques [we may call it “smart accounting”]. Under one model, the e-company goads manufacturer/supplier to raise invoice even as it continues to handle the entire sale transaction. This way, it leaves an impression that it does not own the goods and therefore, will not be deemed to be a retailer [people are more likely to view it as a facilitator].
Alternatively, even as e-company raises invoice on customer, simultaneously, manufacturer/supplier raises an invoice on the e-company. The two operations are ‘synchronized’ to ensure that e-commerce company does not own stock even for a moment. Even as all this documentation engineering happens, it merrily collects the money, keeps its profits and passes on purchase price to the manufacturer/supplier.
To be a successful venture, all big companies viz., Flipkart, Snapdeal, Amazon etc ensure that they have all the ‘logistics’ wherewithal for timely delivery of goods and handle after sale services etc. For this, they not only keep an eye on availability of all sought after goods, their sources/points of supply, contractual agreements but also keep sufficient stocks in their own store houses. They are very well positioned and adequately equipped to initiate and successfully consummate a sales transaction.
All this unambiguously proves that e-commerce companies are performing all core operations that qualify them to be treated as retailers only and that the use nomenclature ‘facilitator’ is meant only to create smokescreen before the tax authorities to escape the tax net [in hindsight, even Karnataka commercial taxes department believed so or else it would not have refused branch certificates to dealers wanting to do business on online market place]
Some analysts have suggested that “e-commerce platform if asked, must disclose all transactions carried on its portal to the tax authorities and help them check any tax evasion by dealers trading through the portal. If, the portal does not want to disclose the names of the dealer then under VAT laws, it should be deemed as a seller”. Like the Karnataka tax department, they are looking for seller who do not exist and are merely surrogates created by e-company behind whom they can hide. Even so, in substance there is nothing like a “deemed” seller; an entity is either a seller or it is not.
The details of transactions carried out on the portal should suffice to a tax administrator with basic common sense to establish that it is none other than the e-company who is the seller. The state VAT department must force them to register as retailers and then, proceed to collect the tax dues. This will be well within its jurisdiction and beyond challenge in the court.
Considering that e-commerce retail business is increasing leaps and bounds [slated to touch US$ 35 billion by 2020], it is imperative that the issue is settled at the earliest to prevent huge loss of revenue to the state exchequer. Under present dispensation, even as consumer pays VAT, the same is not deposited with the tax department [courtesy, the ‘smokescreen’ built around e-commerce transactions]; hence, it must not be allowed to continue even for a day.